Report of Independent Auditors and Financial Statements. Marin Healthcare District

Transcription

1 Report of Independent Auditors and Financial Statements Marin Healthcare District June 30, 2011 and 2010

2 CONTENTS PAGE MANAGEMENT S DISCUSSION AND ANALYSIS 1 4 REPORT OF INDEPENDENT AUDITORS 5 FINANCIAL STATEMENTS Statements of net assets 6 Statements of revenues, expenses, and changes in net assets 7 Statements of cash flows 8 9 Notes to financial statements 10 18

3 Marin Healthcare District MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 This section of Marin Healthcare District s (the District) financial statements presents management s discussion and analysis of the financial activities of the District for the fiscal year ended June 30, We encourage the reader to consider the information presented here in conjunction with the financial statements as a whole. Introduction to the Financial Statements This discussion and analysis is intended to serve as an introduction to the District s audited financial statements, which are comprised of the financial statements. This annual report is prepared in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. The required financial statements include the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows. Notes to the financial statements, supplementary detail and/or statistical information, and this summary support these statements. All sections must be considered together to obtain a complete understanding of the financial picture of the District. Statement of Net Assets This statement includes all assets and liabilities using the accrual basis of accounting as of the statement date. The difference between the two classifications if represented as Net Assets ; this section of the statement identifies major categories of restrictions on these assets and reflects the overall financial position of the District as a whole. Statement of Revenues, Expenses, and Changes in Net Assets This statement presents the revenues earned and the expenses incurred during the year using the accrual basis of accounting. Under the accrual basis, all increases or decreases in net assets are reported as soon as the underlying event occurs, regardless of the timing of the cash flow. Consequently revenues and/or expenditures reported during this fiscal year may result in changes to cash flows in a future period. Statement of Cash Flow This statement reflects inflows and outflows of cash, summarized by operating, capital, financing, and investing activities. The direct method was used to prepare this information, which means gross rather than net amounts were presented for the year s activities. Notes to the Financial Statements This additional information is essential to a full understanding of the data reported in the financial statements. The District is a political sub division of the state of California. It is the lessor of the Marin General Hospital facility and is governed by a Board of Directors. 1

4 Marin Healthcare District MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 Analytical Overview The Statement of Net Assets and Statement of Revenues, Expenses, and Changes in Net Assets present a summary of the District s activities. Table 1 Condensed Statement of Net Assets 6/30/2011 6/30/2010 Current and other assets $ 4,321,579 $ 6,844,550 Capital assets, net of accumulated depreciation 7,234,710 7,577,779 Total assets 11,556,289 14,422,329 Long term debt and other long term liabilities 3,750,843 4,892,439 Other liabilities 1,485,629 4,150,940 Total liabilities 5,236,472 9,043,379 Net assets: Invested in capital assets, net of related debt 7,234,710 7,577,779 Unrestricted deficit (914,893) (2,198,829) Total net assets $ 6,319,817 $ 5,378,950 Summary Total assets of the District have decreased this year by $2,866,040, primarily related to the reduction in receivables from Marin General Hospital (MGH). Liabilities have decreased this year by $3,806,907, as a result of the reduction of accounts payable and the transfer of employee related liabilities to MGH. Effective July 1, 2011, the District s senior management team became employees of MGH. The overall change to net assets is an increase of $940,867, resulting in a June 30, 2011 balance of $6,319,817. 2

5 Marin Healthcare District MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 Comparative Analysis of Current and Prior Year Activities and Balances Increase 6/30/2011 6/30/2010 (Decrease) Operating revenues $ 2,671,841 $ 3,142,792 $ (470,951) Note 2 Operating expenses 1,732,727 1,257, ,249 Note 1 Net operating income $ 939,114 $ 1,885,314 $ (946,200) Non operating revenues $ 1,753 $ 8,858 $ (7,105) Change in net assets $ 940,867 $ 1,894,172 $ (953,305) Note 1 The increase in operating expenses is related to net losses incurred from the expansion of the Clinics. Note 2 The decrease in operating revenue relates to a decrease in settlement funds, offset by increased revenues from the Clinics. Capital Assets At the end of fiscal year 2011, the cost of infrastructure and other capital assets recorded in the District s financial statements was as shown in Table 2 below. Table 2 Capital Assets at Year End Balance at June 30, 2011 Land and improvements $ 2,243,596 Building 25,079,033 Construction in progress Equipment 19,961,931 Less accumulated depreciation (40,049,850) Capital assets, net of accumulated depreciation $ 7,234,710 3

6 Marin Healthcare District MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 Debt Administration On June 30, 2010, the District transferred all of its long term debt to MGH. Economic Outlook and Major Initiatives Economic factors do not have a direct influence on the District s budget. The current lease, effective for fiscal year 2012 and as amended by the Transfer Agreements, requires MGH to pay $98,784 of rent quarterly, irrespective of MGH s net earnings. In addition, the District recognizes $95,133 of deferred lease revenue on a monthly basis. Similarly, the Transfer Agreements require a set annual payment to support the District s expenses, irrespective of economic conditions. Contacting the District s Financial Management This financial report is intended to provide citizens, taxpayers, and creditors with a general overview of the District s finances. Questions about this report should be directed to Marin Healthcare District to the attention of the Executive Director or the Chair of Management, Finance and Audit Committee, at

7 REPORT OF INDEPENDENT AUDITORS To the Board of Directors Marin Healthcare District We have audited the accompanying statement of net assets of Marin Healthcare District (the District) as of June 30, 2011 and 2010 and the related statement of revenues, expenses, and changes in net assets and cash flows for the years then ended. The financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30, 2011 and 2010, and the respective changes in financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Management s Discussion and Analysis on pages 1 through 4 is not a required part of the financial statements, but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures to this information, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit this information and we express no opinion on it. Stockton, California September 29, 2011

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9 STATEMENTS OF NET ASSETS ASSETS JUNE 30, CURRENT ASSETS Cash and cash equivalents $ 2,973,655 $ 1,745,405 Patient accounts receivable, net of allowance for doubtful accounts of $19,547 in ,510 50,723 Other receivables 76,523 4,082,477 Total current assets 3,303,688 5,878,605 Deposits 107,200 42,500 Other long term receivables 910, ,445 Capital assets, net of accumulated depreciation 7,234,710 7,577,779 $ 11,556,289 $ 14,422,329 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable $ 311,031 $ 2,459,278 Accrued expenses 1, ,728 Accrued election expense 31,200 62,336 Current portion of deferred lease revenue 1,141,598 1,141,598 Total current liabilities 1,485,629 4,150,940 Other long term liabilities 3,750,843 4,892,439 Total liabilities 5,236,472 9,043,379 NET ASSETS (DEFICIT) Invested in capital assets net of related debt 7,234,710 7,577,779 Unrestricted (914,893) (2,198,829) Total net assets 6,319,817 5,378,950 Total liabilities and net assets $ 11,556,289 $ 14,422,329 6

10 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS YEARS ENDED JUNE 30, OPERATING REVENUE Lease income $ 1,535,918 $ 1,520,337 Net patient service revenue 959, ,010 Settlement transition 176,500 1,423,445 Total operating revenues 2,671,841 3,142,792 OPERATING EXPENSES Depreciation 389, ,316 Administration 1,343, ,162 Total operating expenses 1,732,727 1,257,478 OPERATING INCOME 939,114 1,885,314 NON OPERATING REVENUE Other revenue 1,753 8,858 Total non operating revenue 1,753 8,858 NET INCOME 940,867 1,894,172 NET ASSETS, beginning of year 5,378,950 3,484,778 NET ASSETS, end of year $ 6,319,817 $ 5,378,950 See accompanying notes 7

11 STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, CASH FLOWS FROM OPERATING ACTIVITIES Receipts from tenants $ 6,335,983 $ 291,680 Receipts from patients 755, ,626 Receipts from settlement 189, ,000 Payments to employees (1,106,345) (164,780) Payments to suppliers and others (4,902,198) (2,061,687) Net cash from operating activities 1,272,648 (1,284,161) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital asset purchases (46,151) (19,894,206) Loan proceeds 21,370,802 Loan payments (2,125,198) Net cash from capital and related financing activities (46,151) (648,602) CASH FLOWS FROM INVESTING ACTIVITIES Interest earned 1,753 8,858 Net cash from investing activities 1,753 8,858 NET CHANGE IN CASH AND CASH EQUIVALENTS 1,228,250 (1,923,905) CASH AND CASH EQUIVALENTS, beginning of year 1,745,405 3,669,310 CASH AND CASH EQUIVALENTS, end of year $ 2,973,655 $ 1,745,405 8

12 STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, RECONCILIATION OF OPERATING INCOME TO NET CASH FROM OPERATING ACTIVITIES Operating income $ 939,114 $ 1,885,314 Adjustments to reconcile operating income to net cash from operating activities: Depreciation 389, ,316 Changes in certain assets and liabilities: Prepaid items (64,700) (31,500) Patient accounts receivable (202,787) (50,723) Other receivables 4,018,708 (4,077,271) Accounts payable (2,148,247) 1,484,912 Other long term liabilities (1,141,596) (1,228,657) Accrued expenses (517,064) 300,448 Net cash from operating activities $ 1,272,648 $ (1,284,161) NON CASH CAPITAL FINANCING ACTIVITY: On June 30, 2010, the District transferred a total of $29,361,656 in long term debt and $32,290,037 in construction in progress to Marin General Hospital (MGH), a California non profit public benefit corporation, as part of the transfer of control (Note 6). See accompanying notes 9

13 NOTES TO FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION AND ACCOUNTING POLICIES Reporting entity Marin Healthcare District (the District) is a political subdivision of the state of California. District directors are elected officials whose sole mission is to promote the health and welfare of the residents of the communities served by the District. The District operated the Marin General Hospital facility (the Hospital facility) until 1985, when it reorganized in compliance with local hospital district law of the state of California. The District s principal asset is hospital property, plant, and equipment. The hospital is a general acute care facility located in Marin County, California, and provides inpatient and outpatient healthcare services. Inpatient facilities consist of medical surgical, pediatrics, maternity, nursery, intensive care, coronary, psychology, and radiology and laboratory services. The hospital facility is leased to MGH. The District was the sole member of Marin General Hospital Foundation (the Foundation), a California not for profit public benefit corporation whose mission is to inspire philanthropy for the benefit of MGH, effective as of January 1, The Foundation s bylaws were amended such that MGH became the sole member of the Foundation effective as of June 30, The Foundation is consolidated with MGH for financial reporting purposes and correspondingly is not included in the District reporting entity for either period presented. In addition to overseeing MGH s compliance with the lease agreement, the District is a forum for discussion of local healthcare issues, promotes healthcare services within the community, and acts on behalf of the public as an advocate of high quality, reasonably priced healthcare services. The financial statements of the District include the accounts of the District and includes four healthcare clinics (the Clinics). The District formed the Clinics, pursuant to California Health and Safety Code Section 1206(b). The Clinics contract with physicians to provide health care services within the District s geographic boundaries. The Clinics operations were not significant in Proprietary fund accounting The activities of the District are accounted for as an Enterprise Fund. Enterprise Funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting. Under the method, revenues are recorded when earned and expenses are recorded at the time obligations are incurred. 10

14 NOTES TO FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) Accounting standards In compliance with Governmental Accounting Standards Board (GASB) Statement No. 20, the District has chosen to apply all applicable GASB pronouncements and all Financial Accounting Standards Board Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins issued on or before November 30, 1989, unless they conflict with or contradict GASB pronouncements. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Non operating revenues, such as subsidies and investment earnings, result from nonexchange transactions or ancillary activities. The District may fund programs with a combination of cost reimbursement grants, categorical block grants, and general revenues. Thus, both restricted and unrestricted net assets may be available to finance program expenditures. The District s policy is to first apply restricted grant resources to such programs, followed by general revenues if necessary. Use of estimates The financial statements have been prepared in conformity with U.S. generally accepted accounting principles, and as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. Actual results could differ from those estimates. Net assets Net assets is the excess of all the District s assets over all its liabilities, regardless of fund. Net assets are divided into captions under GASB Statement No. 34. These captions apply only to net assets, which is determined only at the government wide level, and are described below: Invested in capital, net of related debt: the portion of the net assets that is represented by the current net book value of the District s capital assets, less the outstanding balance of any debt issued to finance these assets. Restricted: the portion of net assets that is restricted as to use by the terms and conditions of agreements with outside parties, governmental regulations, laws, or other restrictions which the District cannot unilaterally alter. The District has no restricted net assets. Unrestricted: the portion of net assets that is not restricted to use. Cash and cash equivalents Cash and cash equivalents include cash in bank checking, money market funds and investments in highly liquid debt instruments with a maturity of three months or less when purchased. Capital assets Capital assets are recorded at cost. Depreciation is provided on the straight line basis over the estimated useful lives of the assets. The capitalization threshold is $5,000. Risk management The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters for which the District carries commercial insurance. The Clinics are insured under MGH s insurance policy. MGH is insured for professional and general liability. The professional and general liability coverage is for a claims made policy, which limits coverage to claims that are reported to the insurance company during the policy year. 11

15 NOTES TO FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) Deferred revenue lease Deferred revenue represents capital expenditures by MGH in excess of the current commitment, which will be recognized as rental revenue in future years (Note 4). Lease income The District recognizes lease income and reimbursement of operating expenses when earned. The District derives substantially all of its lease income from MGH. The annual rent pursuant to the 30 year lease agreement with MGH, as amended by the Transfer Agreements, is $1,500,000, most of which MGH has prepaid in the form of capital expenditures on the Hospital facility, and MGH also reimburses the District for administrative expenses through quarterly cash payments, which are increased annually by 5% (Note 4). Patient service revenue and credit concentrations The District s patient service revenues is recognized when health care services are provided to patients at the Clinics. Net patient service revenue is reported at the estimated net realizable amount from patients, governmental programs, health maintenance, and preferred provider organizations and insurance contracts under applicable laws, regulations, and program instructions. Net realizable amounts are generally less than the District s established rates. The District provides estimated losses on accounts receivable based on prior bad debt experience. No interest is charged on past due balances. Past due status is based on the date of services provided. Recoveries from previously charged off accounts are recorded when received. The mix of receivables from patients and third party payors is as follows: June 30, 2011 Medicare 30% Medi Cal 10% Other 60% 100% Operating revenues and expenses The District s statement of revenues, expenses, and changes in net assets distinguishes between operating and non operating revenues and expenses. Operating revenues result from leasing the hospital facility to MGH and providing health care services to patients at the Clinics. Non exchange revenues, including taxes, grants, and contributions received for purposes other than capital asset acquisition, are reported as non operating revenues. Operating expenses are all expenses incurred in order to lease the hospital facility and to provide health care services, other than financing costs. 12

16 NOTES TO FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) New accounting pronouncements In December 2010, GASB issued GASB Statement No. 62, Codification of Accounting and Financial Reporting Contained in Pre November 30, 1989 and AICPA Pronouncements, which incorporates into the GASB s authoritative literature certain accounting and financial reporting guidance that is included in pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements. This pronouncement is effective for periods beginning after December 15, Grants and contributions The District may periodically receive grants and contributions from other governmental entities, individuals, or private organizations. Revenues from grants and contributions (including contributions of capital assets) are recognized when all eligibility requirements, including time requirements, are met. Grants and contributions may be restricted for either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are restricted to a specific operating purpose are reported as nonoperating revenues. Amounts restricted to capital acquisitions are reported after non operating revenues and expenses. NOTE 2 CASH AND INVESTMENTS Cash balances from all funds are combined and invested to the extent possible pursuant to the District Board approved Investment Policy and Guidelines and Statement Government Code. The District s investments are carried at fair value. Authorized investments In accordance with Section of the California Government Code, the District may invest in the following types of investments: Securities of the U.S. government, or its agencies Negotiable certificates of deposits Local Agency Investment Fund (State Pool) deposits Custodial credit risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for deposits and investments is the risk that, in the event of the failure of the counterparty (e.g., broker dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. California law requires banks and savings and loan associations to pledge government securities with a market value of 110% of the District s cash on deposit or first trust deed mortgage notes with a value of 150% of the deposit as collateral for these deposits. Under California law, this collateral is held in the District s name and places the District ahead of general creditors of the institution. 13

17 NOTES TO FINANCIAL STATEMENTS NOTE 2 CASH AND INVESTMENTS (CONTINUED) The District places certain funds with the state of California s Local Agency Investment Fund (LAIF). The District is a voluntary participant in LAIF, which is regulated by California Government Code Section under the oversight of the Treasurer of the state of California and the Pooled Money Investment Board. The state Treasurer s office pools these funds with those of other governmental agencies in the state and invests the cash. The fair value of the District s investment in this pool is reported in the accompanying financial statements based upon the District s pro rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The monies held in the pooled investment funds are not subject to categorization by risk category. The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on the amortized cost basis. Funds are accessible and transferable to the master account with 24 hours notice. Financial statements for LAIF can be obtained from the California State Treasurer s Office, 915 Capitol Mall, Suite 110, Sacramento, California, The management of the state of California Pooled Money Investment Account has indicated to the District that as of June 30, 2011 and 2010 the estimated market value of the pool (including accrued interest) was $26,990,453 and $26,853,337, respectively. The District s proportionate share of that value is $297,007 and $295,563 as of June 30, 2011 and 2010, respectively. NOTE 3 CAPITAL ASSETS The following is a summary of changes in capital assets during the years ended June 30: Balance, Balance, Life (Years) June 30, 2010 Additions Deletions June 30, 2011 Equipment 3 20 $ 18,784,416 $ $ $ 18,784,416 Hospital buildings 40 24,974,084 24,974,084 Construction in progress (not depreciated) N/A Parking structure 40 2,324 2,324 Phase 1 building , ,625 Land (not depreciated) N/A 865, ,701 Other improvements , ,491 Parking improvements , ,404 Moveable equipment ,131,364 46,151 1,177,515 Subtotal 47,238,409 46,151 47,284,560 Less accumulated depreciation (39,660,630) (389,220) (40,049,850) Capital assets, net of accumulated depreciation $ 7,577,779 $ (343,069) $ $ 7,234,710 14

18 NOTES TO FINANCIAL STATEMENTS NOTE 3 CAPITAL ASSETS (CONTINUED) Balance, Balance, Life (Years) June 30, 2009 Additions Deletions June 30, 2010 Equipment 3 20 $ 18,784,416 $ $ $ 18,784,416 Hospital buildings 40 24,974,084 24,974,084 Construction in progress (not depreciated) N/A 12,436,467 19,853,570 (32,290,037) Parking structure 40 2,324 2,324 Phase 1 building , ,625 Land (not depreciated) N/A 865, ,701 Other improvements , ,491 Parking improvements , ,404 Moveable equipment ,090,728 40,636 1,131,364 Subtotal 59,634,240 19,894,206 (32,290,037) 47,238,409 Less accumulated depreciation (39,227,314) (433,316) (39,660,630) Capital assets, net of accumulated depreciation $ 20,406,926 $ 19,460,890 $ (32,290,037) $ 7,577,779 The District s property, plant, and equipment are leased to and used exclusively by MGH. Depreciation expense for the years ended June 30, 2011 and 2010, was $389,220 and $433,316, respectively. NOTE 4 LEASE OF MARIN HEALTHCARE DISTRICT FACILITY Annual rental payments Effective December 1, 1985, the District leased the Marin General Hospital facility to MGH for a term of 30 years pursuant to Section of the Local Hospital District Law. Per the amended lease agreement dated August 25, 1987, as further amended by the Transfer Agreements (Note 5), the annual rent payments comprise capital expenditures made by MGH and quarterly payments of approximately $94,000 for The minimum cash payment, which is payable in quarterly installments, increases annually by 5% throughout the lease term. Due to the significant capital investment required for the hospital modernization program completed in June 1989, MGH s rental payment commitment for capital expenditures due under the entire lease has been satisfied. The advanced capital commitment (including the excess capital commitment) has been recorded as deferred revenue. The total deferred lease revenue was $4,892,441 and $6,034,037 as of June 30, 2011 and 2010, respectively. 15

19 NOTES TO FINANCIAL STATEMENTS NOTE 4 LEASE OF MARIN HEALTHCARE DISTRICT FACILITY (CONTINUED) The deferred lease revenue will be amortized over the remaining term of the lease, which ends on December 1, Future amortization of deferred lease revenue is as follows: Fiscal Year End Amortization Cash Payment Total $ 1,141,598 $ 395,138 $ 1,536,736 1,141, ,895 1,556,493 1,141, ,640 1,577,238 1,141, ,422 1,599, , , ,171 Total $ 4,892,441 $ 1,903,217 $ 6,795,658 Capital improvement payments In addition to the capital obligation described under annual rental payments, the lease agreement, as amended by the Transfer Agreements, required MGH to make minimum annual capital expenditures (buildings and equipment) during the settlement period. The obligation was approximately $2.90 million for the year ended June 30, The District did not have a capital obligation for the year ended June 30, Effective June 30, 2010, the lease agreement between the District and MGH was amended. The amended lease agreement requires that MGH provide financial support to the District relating to the operation of the Clinics. MGH provided $453,538 to the District for the operation of the Clinics in NOTE 5 SETTLEMENT In June 2005, MGH, which was operated by and under the control of Sutter Health, a northern Californiabased not for profit integrated health care system (Sutter), filed a lawsuit for declaratory relief against the District. At issue was whether the lessor or the lessee was responsible for the seismic upgrade of the Hospital facility as required by California Senate Bill 1953, enacted in 1994 (the Hospital Seismic Upgrade Act). The parties signed a settlement agreement (Settlement Agreement) dated October 4, The Settlement Agreement incorporates a transfer agreement and an interim funding agreement (collectively, Transfer Agreements) that describe contractual rights and obligations of the parties with respect to the Transfer through which the District became the sole corporate member of MGH on June 30, 2010 (the Transfer). Under the Transfer Agreements, the District assumed full responsibility and all financial liability associated with pre transfer compliance with the Hospital Seismic Upgrade Act (SB 1953), including necessary extensions for compliance. The deadline for compliance with SB 1953 is January 1, As part of that transfer of control, MGH assumed all liabilities of the District related to the Transfer Agreements. As part of the transfer of control, the District and MGH were required to replace the hospital s information technology system and other programs and contracts such as major purchasing agreements, managed care agreements, and insurance. These items were purchased and installed in

20 NOTES TO FINANCIAL STATEMENTS NOTE 5 SETTLEMENT (CONTINUED) In 2010, the District made a loan of $1,081,405 to a Medical Foundation that was formed by MGH and a local physician s group. The Medical Foundation s purpose is establishing, operating and maintaining multi specialty medical clinics. As of June 30, 2010, the District transferred the note receivable due from the Medical Foundation to MGH who has recorded the investment as a beneficial interest asset. As of June 30, 2010, the District had a receivable due from MGH of $4,057,181 relating to the Transfer and the formation of the Medical Foundation. The Transfer Agreements allow, and the District has created, an appointed subsidiary operating Board of Directors (Board) to provide oversight and run the day to day operations of MGH after the District becomes the sole corporate member of MGH. The Board has the sole authority to operate the hospital. NOTE 6 LOANS PAYABLE AND PURCHASE OBLIGATION Pursuant to the Interim Funding Agreement executed along with the Transfer Agreements on October 4, 2006, the District has received funding from Sutter for the establishment of a transition team to implement the Transfer Agreements. These agreements relate to the resolution of legal proceedings from June 30, Under the Interim Funding Agreement, the District has received $500,000 on July 1 and January 1 of each year January 2007 through In addition, as of the Transfer, the District was responsible for executing a promissory note to pay back one half of all amounts provided under the Interim Funding Agreement plus interest at the prime rate plus two percent. The District had accrued $1,525,938 in principal and interest due under this arrangement at June 30, Total principal and interest payments of $2,125,198 were made under this arrangement in June 2010 upon transfer, and the obligation is considered satisfied in full. On November 8, 2008, the District entered into a loan agreement with the County of Marin for an amount up to $20,000,000. The funds were needed to make preparation for the Transfer. The interest rate is prime plus one percent. The term of the loan will end no later than 75 days after the Transfer date, or no later than September 13, The District had $4.5 million outstanding under this arrangement at June 30, 2009 and borrowed another $8,000,000 during That amount outstanding ($12.5 million), along with accrued interest, was transferred to MGH as a hospital obligation upon transfer of control. As of June 30, 2010, the District did not have any amounts outstanding under this arrangement. The District entered into a loan agreement with ACS Healthcare Solutions for the implementation of information technology upgrades to Marin General Hospital. The District is contractually committed for up to $14,000,000, which may be increased through change orders prior to the Hospital transfer date. As of June 30, 2010 and 2009, the outstanding balance of the loan is $0 and $6,053,177, respectively. This obligation was transferred to MGH as a hospital obligation upon transfer of control. In June 2010, the District borrowed $2,000,000 from the Foundation. The loan bears an interest rate of 6% per annum. The outstanding balance of $2,000,000, along with accrued interest, was transferred to MGH as a hospital obligation upon transfer of control and was included in the District s receivable due from MGH as of June 30, As of June 30, 2010, the District did not have any amounts outstanding under this arrangement. In July 2010, MGH remitted the balance due to the Foundation to the District who then remitted payment to the Foundation. 17

21 NOTES TO FINANCIAL STATEMENTS NOTE 7 COMMITMENTS Compliance with the Hospital Seismic Upgrade Act Pursuant to settlement, the District became the sole corporate member of MGH as of June 30, Pursuant to the Transfer Agreements, the District has assumed full responsibility and all financial liability for compliance SB The District estimates seismic architectural and engineering costs of approximately $35,000,000. NOTE 8 CONTINGENT LIABILITIES Pending litigation The District and MGH have alleged that Sutter has breached its fiduciary duty to MGH, as well as other breaches of the Transfer Agreements (Note 5). Sutter has filed certain counterclaims against the District and MGH. The parties are currently in arbitration relating to the claims and counterclaims. The likelihood of adverse outcome related to these matters at this time cannot be estimated; however, management believes that the ultimate resolution will not have a materially adverse effect on the District s financial position. As of June 30, 2011 and 2010, the District has $910,691and $923,445 due from Sutter, respectively. NOTE 9 OPERATING LEASES The District and the Clinics lease office facilities under a non cancelable operating lease. The total cost for the leases were $223,833 for the fiscal year ended June 30, The future minimum lease payments were as follows: Years Ending June 30, Amount 2012 $ 180, , , , ,539 Thereafter 92,654 $ 810,874 NOTE 10 MANAGEMENT SERVICES AGREEMENT AND SUBSEQUENT EVENTS The District entered into a management services agreement with MGH effective June 30, The agreement requires that the District s senior management team, legal counsel, and consultants provide MGH with services. In consideration of the service provided, MGH would reimburse the District for costs incurred. The agreement terminates on June 30, As of June 30, 2011, the District has $76,523 due from MGH relating to this agreement. Effective July 1, 2011, the District s senior management team became employees of MGH and will provide management services to the District on a contract basis. 18